Gujarat Informatics Ltd., Gandhinagar V. The ACIT(OSD), GNR Circle, Gandhinagar

ITA 1555/AHD/2006

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6218 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 27-06-2011
• Assessment Year: 2002-2003
• Appeal Filed On: 15-06-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : AH MEDABAD ( BEFORE HONBLE SHRI T.K.SHARMA, J.M. & HONBLE SHRI A.K.GARODIA, A.M.) I.T.A.NO. 1555/AHD./2006 : ASSESSMENT YEAR 200 2-03 GUJARAT INFORMATICS LTD., AHMEDABAD VS- ACIT (OSD), GANDHINAGAR CIRCLE (PAN : AABCG 5863B) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S.N.SOPARKAR WITH MS. URV ASHI SODHAN RESPONDENT BY : SHRI SAMIR TEKRIWAL, SR.D.R. O R D E R PER SHRI T.K.SHARMA, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF LD. CIT(A), GANDHINAGAR DATED 22.03.2006 CONFIRMING THE ACTION OF THE AO IN DISALLOWING THE INTEREST EXPENDITURE OF RS.1,17,00,000/- UNDER SECT ION 14A OF THE I. T. ACT, 1961 FOR THE ASSESSMENT YEAR 2002-2003. 2. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF DEVELOPMENT OF INFORMATION TECHNOLOGY. THE ASSESSEE COMPANY IS A GOVERNMENT COMPANY REGISTERED UNDER THE COMPANIES A CT, 1956. FOR THE ASSESSMENT YEAR UNDER APPEAL, IT FILED THE RETURN OF INCOME DE CLARING TOTAL LOSS OF RS.1,06,12,404/-. DURING THE COURSE OF SCRUTINY, THE AO NOTICED THAT THE ASSESSEE HAS BORROWED A LOAN OF RS.24 CRORES FROM THE GOVERNMENT OF GUJARAT AND HAD PAID INTEREST OF RS.3.12 CRORES ON THIS LOAN. THE ASSESSEE HAS ALSO INVESTED A PART OF THIS LOAN IN GUJARAT INFORMATION TECHNOLOGY FUND WHICH HAS BEEN REGISTERED AS VENTUR E CAPITAL FUND BY SEBI UNDER THE SECURITIES AND EXCHANGE BOARD OF INDIA (VENTURE CAPITAL FUNDS) REGULATIONS, 1996. FROM THIS INVESTMENT, THE ASSESSEE HAS EARNED RS.13,02,311/- (RS.4,00,535/- AS SHORT TERM CAPITAL GAIN AND RS.9,01,776/- AS OTHER INCOME) WHICH HAS BEEN CLAIMED AS EXEMPT U/S. 10(23FB) OF THE INCOME TAX ACT. 2 ITA NO.1555/AHD./2006 2.1 IN THE ASSESSMENT ORDER, THE AO NOTICED THAT TH E ASSESSEE PAID INTEREST @13% ON RS.24 CRORES WHICH COMES TO RS.3.12 CRORES AND W HICH HAS BEEN DEBITED TO ASSESSEES PROFIT & LOSS A/C. AS INTEREST ON VENTUR E FUND LOAN ACCOUNT. OUT OF THIS LOAN, THE ASSESSEE HAS INVESTED RS.15 CRORES IN INTEREST BEARING DEPOSITS WHICH HAS BEEN OFFERED FOR TAXATION AND INCOME FROM WHICH HE HAS S HOWN UNDER THE HEAD INCOME FROM OTHER SOURCES. OUT OF 24 CRORES OF LOAN TAKEN FROM THE GOVERNMENT OF GUJARAT, RS.9 CRORES WERE DEPLOYED IN THE GUJARAT INFORMATIO N TECHNOLOGY FUND AND THE INCOME FROM THIS INVESTMENT WAS CLAIMED AS EXEMPT U NDER SECTION 10(23FB) OF THE INCOME TAX ACT. THUS, THE ASSESSEE HAS PAID INTERES T OF RS.1.17 CRORES ON RS.9 CRORES WHICH HAS BEEN INVESTED IN EARNING INCOME WHICH IS EXEMPT UNDER SECTION 10(23FB) OF THE I.T. ACT, 1961. HE, THEREFORE, INVOKED THE P ROVISIONS CONTAINED IN SECTION 14A OF THE I.T. ACT AND DISALLOWED INTEREST EXPENDITURE AMOUNTING TO RS.1.17 CRORES. 3. ON APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE PO INTED OUT THAT THERE IS A MISTAKE IN THE RETURN OF INCOME FILED WHEREIN THE INCOME FR OM VENTURE CAPITAL FUND WAS CLAIMED AS EXEMPT. SUCH INCOME WAS ACTUALLY TAXABLE UNDER SECTION 115U OF THE I.T. ACT, 1961. IN SUPPORT OF THIS, A LETTER ISSUED BY G VFL DATED 14.10.2002 WAS FILED ALONG WITH THE RETURN OF INCOME. IT WAS ARGUED THAT SINCE THE INCOME WAS ACTUALLY CHARGEABLE TO TAX, THE PROVISIONS OF SECTION 14A ID NOT APPLY TO THE FACTS. THE LD. CIT(A) CALLED FOR THE COMMENTS OF THE AO. THE AO, I N HIS REMAND REPORT DATED 10.03.2006, MADE THE FOLLOWING COMMENTS. THE CLAIM OF THE APPELLANT THAT THE INCOME IS TAXA BLE UNDER SECTION 115U IS NOT CORRECT. THE SUB-SECTION (1) OF SECTION 115U ST ATES THAT ANY INCOME RECEIVED BY A PERSON OUT OF INVESTMENT MADE IN A VE NTURE CAPITAL COMPANY / FUND (HEREINAFTER AFTER REFERRED AS V.C.F. /V.C.C, AS THE CASE MAY BE) SHALL BE CHARGEABLE TO INCOME-TAX IN THE SAME MANNER AS IF I T WERE THE INCOME RECEIVED BY SUCH PERSON HAD HE MADE INVESTMENTS DIRECTLY IN THE VENTURE CAPITAL UNDERTAKING. THE IMPLICATION OF THIS PROVISION IS THAT INCOME OU T OF INVESTMENT MADE IN VENTURE CAPITAL COMPANY /FUND SHALL BE TREATED AS I NVESTMENT MADE DIRECTLY IN THE VENTURE CAPITAL UNDERTAKING AND SUCH INCOME OF A V.C.C. / V'.C.F. SET UP TO RAISE FUNDS FOR INVESTMENT IN VENTURE CAPITAL UN DERTAKING IS EXEMPTED U/S.10(23FB) OF THE ACT. THIS FACT IS FURTHER FORTI FIED BY SUB-SECTION (3) OF SEC.115U OF THE ACT WHICH STATES THAT THE INCOME PA ID BY THE V.C.C./V.C.F. SHALL BE DEEMED TO BE OF THE SAME NATURE AND IN SAM E PROPORTION IN THE HANDS OF THE PERSON RECEIVING SUCH INCOME AS IT HAD BEEN RECEIVED BY OR HAD ACCRUED 3 ITA NO.1555/AHD./2006 TO THE VENTURE CAPITAL COMPANY/FUND DURING THE YEAR . THUS, BY DEEMING PROVISION OF SUB-SECTION (3). THE INCOME RECEIVED B Y THE ASSESSEE IS DEEMED TO BE INCOME RECEIVED OR ACCRUED TO THE VENTURE CAPITA L COMPANY / FUND. AS PER SECTION 10(23FB). INCOME OF VENTURE CAPITA! COMPANY / FUND IS EXEMPTED. THUS, COMBINED READING OF SUB-SECTION (1) AND (3) O F THE SECTION 115U R.W.S. 10(23FB) MAKE IT CLEAR THAT INCOME RECEIVED OUT OF INVESTMENT MADE IN VC'C/VCF IS EXEMPTED. IN OTHER WORDS THE ASSESSEE HAD RIGHTLY AND KNOWINGLY CLAIMED IT AS EXEMPTED INCOME IN RETURN OF INCOME. HOWEVER, DUE TO APPLICATION OF SEC.14A BY THE AO, THE ASSESSEE HAD CHANGED ITS STAND DURING APPELLATE PROCEEDING TO MITIGATE AND OVERCOME CONSE QUENCES OF SECTION 14A OF THE ACT. ACCORDINGLY, IT IS HUMBLY PRAYED THAT THE ACTION OF THE AO IS CORRECT WHICH MAY KINDLY BF UPHELD IN TOTO.' 3.1 BEFORE THE LD. CIT(A), IN REJOINDER, THE ASSESS EE RAISED THE FOLLOWING ARGUMENTS: 1) THE GUJARAT VENTURE FINANCE LTD. (GVFL) IN THEI R LETTERS, INCLUDING LETTER DATED 22/03/2005, HAD INFORMED THE APPELLANT-COMPAN Y THAT THE INCOME RECEIVED OUT OF INVESTMENT MADE IN VENTURE CAPITAL FUND WAS CHARGEABLE TO TAX AS PER SECTION 115U OF THE I.T. ACT. 2) THE OTHER RECIPIENTS OF INCOME FROM INVESTMENT I N VENTURE CAPITAL FUND IN THE ABOVE GVFL HAD ADMITTED SUCH INCOME FOR TAX. 3) SECTION 115U STIPULATES THAT THE INCOME RECEIVE D BY A PERSON FROM VENTURE CAPITAL FUND IS CHARGEABLE TO TAX AND HENCE THE SAM E IS TAXABLE. 3.2 AFTER CONSIDERING THE AFORESAID SUBMISSIONS, TH E LD. CIT(A) UPHELD THE DISALLOWANCE FOR THE DETAILED REASONS GIVEN IN PARA 2.4 OF THE IMPUGNED ORDER, WHICH READS AS UNDER: 2.4. THE FACTS OF THE CASE AND THE SUBMISSIONS HA VE BEEN CONSIDERED. THE ADDITIONAL COMMISSIONER OF INCOME-TAX IN HIS SUBMIS SIONS (QUOTED IN PARA 2.2. OF THIS ORDER) HAD CLEARLY EXPLAINED THAT THE INCOM E EARNED BY THE APPELLANT FROM VENTURE CAPITAL FUND EXEMPT U/S.10(23FB) OF TH E I.T. ACT. IN THE ABOVE CONTEXT, THE PROVISIONS OF SECTION 14A ARE AP PLICABLE AND THE INTEREST EXPENDITURE WAS CORRECTLY DISALLOWED BY THE ASSESSI NG OFFICER. THE DISALLOWANCE IS UPHELD. 4. AGGRIEVED WITH THE ORDER OF THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING GROUND: 4 ITA NO.1555/AHD./2006 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CON FIRMING THE ACTION OF AO IN DISALLOWING INTEREST EXPENDITURE OF RS.1,17,00,000/ - U/S 14A OF THE ACT WITHOUT APPRECIATING THAT THE APPELLANT HAS EARNED NO EXEMP T INCOME AND/OR THE INCOME EARNED BY THE APPELLANT IS FULLY TAXABLE . 5. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF T HE ASSESSEE, SHRI S.N.SOPARKAR APPEARED AND CONTENDED THAT THE ASSESSEE HAS RAISED THE FOLLOWING ADDITIONAL GROUND: LEARNED ASSESSING OFFICER AND CIT(A) HAVE ERRED IN LAW IN HOLDING THAT INCOME OF RS.9,01,776/- IS EXEMPT U/S 10(23FB) OF T HE INCOME TAX ACT. BOTH THE LOWER AUTHORITIES HAVE FAILED TO APPRECIATE THE FACT THAT IT IS NOT THE INCOME EXEMPT FROM TAX AND THE LOWER AUTHORITIES OUGHT TO HAVE BROUGHT THE SAME TO TAX. 5.1 THE LD. COUNSEL OF THE ASSESSEE POINTED OUT THA T THE AFORESAID ADDITIONAL GROUND OF APPEAL, WHICH IS A LEGAL GROUND, BE ACCEPTED, AS PER THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF NATIONAL THERMAL POWER REPORTED IN 229 ITR 383. ON MERIT, THE COUNSEL OF THE ASSESSEE SUBMITTED THAT T HE ASSESSEE IS NEITHER VENTURE CAPITAL COMPANY (VCC) NOR VENTURE CAPITAL FUND (HER EINAFTER REFERRED TO VCF/VCC AS THE CASE MAY BE). THEREFORE, ITS INCOME IS NOT E XEMPT UNDER SECTION 10(23FB) OF THE I.T. ACT, 1961. THE COUNSEL OF THE ASSESSEE ALS O DREW OUR ATTENTION TO PAGE 7 TO 9 OF THE PAPER BOOK, WHICH CONTAINED A LETTER DATED 1 4.10.2002, WRITTEN BY GUJARAT VENTURE FINANCE LTD. TO THE ASSESSEE. IN THE CERTIF ICATE, IT IS MENTIONED THAT FOLLOWING INCOME IS CHARGEABLE UNDER SECTION 115U OF THE I.T. ACT FOR THE ASSESSMENT YEAR 2002- 03. TOTAL INCOME RS.13,02,311/- AMOUNT PAID UNDER SHORT TERM CAPITAL GAIN RS. 4, 00,535/- OTHER INCOME RS. 9,01,776/- 5.2 ON THE STRENGTH OF THE AFORESAID CERTIFICATE AN D PROVISIONS CONTAINED IN SECTION 115U, THE COUNSEL OF THE ASSESSEE POINTED OUT THAT INCOME OF THE ASSESSEE FROM GUJARAT VENTURE FINANCE LTD. (VGFL) IS TAXABLE AND NOT EXEMPT UNDER SECTION 10(23FB). THEREFORE, NO DISALLOWANCE CAN BE MADE UN DER SECTION 14A OF THE I.T. ACT, 1961. BOTH THE DEPARTMENTAL AUTHORITIES BELOW HAVE ERRED IN NOT TAXING THE INCOME CHARGEABLE UNDER SECTION 115U AMOUNTING TO RS.13,02 ,311/-. 6. ON THE OTHER HAND, SHRI SAMIR TEKRIWAL, APPEARIN G ON BEHALF OF THE REVENUE, VEHEMENTLY SUPPORTED THE ORDERS OF BOTH THE DEPARTM ENTAL AUTHORITIES BELOW. HE 5 ITA NO.1555/AHD./2006 POINTED OUT THAT IN THE RETURN OF INCOME, THE ASSES SEE CLAIMED THE INCOME RECEIVED FROM GUJARAT VENTURE COMPANY LTD. AS EXEMPT UNDER S ECTION 10(23FB) OF THE I.T. ACT, 1961. THEREFORE, THE AO RIGHTLY DISALLOWED RS. 1,17,00,000/- UNDER SECTION 14A OF THE I.T. ACT, 1961. WITH REGARD TO THE ADDITIONA L GROUND, NOW RAISED, THE LD. DR POINTED OUT THAT THIS MAY NOT BE ADMITTED AT THIS S TAGE BECAUSE IN THE RETURN OF INCOME, THE ASSESSEE COMPANY ITSELF CLAIMED THAT ITS INCOME FROM GUJARAT VENTURE COMPANY IS EXEMPT UNDER SECTION 10(23FB) OF THE I.T. ACT, 1961 . IN REJOINDER, THE COUNSEL OF THE ASSESSEE DREW OUR ATTENTION TO THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT-VS- JAI PARABOLIC SPRINGS LTD. REPORTED IN 306 ITR 42(DELHI). 7. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT THE ASSESSEE IS NEITHER VENTURE CAPITAL COMPANY (VCC) NOR VENTURE CAPITAL FUND AND ITS INCO ME IS NOT EXEMPT UNDER SECTION 10(23FB) OF THE I.T. ACT, 1961. AS A MATTER OF FACT , ITS ENTIRE INCOME AMOUNTING TO RS.13,02,311/- IS CHARGEABLE UNDER SECTION 115U OF THE I.T. ACT, 1961. THE MERE FACT THAT IN THE RETURN OF INCOME, THE ASSESSEE HAS CLAI MED THIS INCOME AS EXEMPT UNDER SECTION 10(23FB) OF THE I.T. ACT, 1961, CANNOT DEBA R THE APPELLATE AUTHORITY IN DIRECTING THE AO TO TAX THE SAME IN CASE IT IS NOT EXEMPT UNDER SECTION 10(23FB) OF THE ACT. IN SUPPORT OF THIS, RELIANCE CAN BE PLACED ON THE JUDGEMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF JAI PARABOLIC SPRIN GS LTD. ( SUPRA ). IN VIEW OF THIS, WE DIRECT THE AO TO TAX THE INCOME OF RS.13,02,311/- R ECEIVED FROM GUJARAT VENTURE FINANCE LTD. AND DELETE THE DISALLOWANCE OF RS.1.17 CRORES MADE UNDER SECTION 14A OF THE I.T. ACT, 1961. THE AO IS ACCORDINGLY DIRECTED TO RE-COMPUTE THE INCOME OF THE ASSESSEE. 8. IN THE RESULT, FOR STATISTICAL PURPOSES, THE APP EAL OF THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.06.2011 SD/- SD/- (A.K.GARODIA) (T.K.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 30/06/2011 6 ITA NO.1555/AHD./2006 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT 3) CIT(A) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, AHMEDABAD TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S.